Is Philip Morris Stock a Reopening Play?

Disney NYSE: DIS. Live Nation NYSE: LYV. Philip Morris (NYSE: PM)? The biggest winners of 2021 will most likely be companies that benefit from the easing of COVD-19 restrictions. Some, such as Disney and Live Nation, will see revenue surge when the economy reopens. Philip Morris, however, will only see a smaller uptick in sales.

The market is pricing in a massive recovery for Disney and Live Nation though. Philip Morris, on the other hand, does not have any type of recovery priced into its shares. That’s a mistake. A mistake that you can capitalize on.

PM Came Out with a Strong Forecast on Investor Day

Philip Morris held its Investor Day event last week, and there was a lot to like. Here are some of the highlights:

• Reaffirmed 2021 full-year reported diluted EPS of $5.90 to $6.00, up 14-16% over reported diluted EPS of $5.16 in 2020.
• Expects net revenue and adjusted diluted EPS to grow at CAGRs of more than 5% and 9%, respectively, over the next three years.
• Expects to commercialize IQOS in a total of 100 markets by 2025, up from 64 markets in 2020.
• Philip Morris’ goal was previously for smoke-free products to account for 38-42% of net revenue by 2025. It increased that to more than 50% by 2025.
• The company thinks that cigarette sales can end within 10-15 years in many countries.

Yes, you read that right. Philip Morris is imagining a world without cigarettes, and this isn’t the first time it has done so. The company doesn’t seem too bothered by the possibility either, as reduced-risk products (RRPs) could pick up the slack.

Before we get into RRPs, it must be said: this is a good PR move, but the chances of cigarette sales ending in “many” countries in 10-15 years is low. Maybe a few, but not many.

Yes, cigarette consumption is in a long-term downtrend – dropping around 3% per year – but Philip Morris is still selling billions of packs of cigarettes per year. If consumption drops by 3% for each of the next 15 years, cigarette sales would still be around 60% of current levels.

Is Philip Morris really going to give up that much revenue without a fight? Don’t count on it.

Cigarette Rebound + Continued RRP Growth Could Equal Big 2021

Philip Morris’ “combustible products” category – which includes cigarettes and other tobacco products (OTPs) – saw revenue dip 9.7% for full-year 2020.

Management talked about why sales declined by so much on the Q4 earnings call: “As we have covered in prior quarters, lower daily consumption in combustible has been driven by two main factors. First, the reduction in usage occasions during confinement especially in markets with a large amount of daily wage workers and second, the reduced amount of social occasions due to the closure of hospitality settings and the restriction on social gatherings.”

Once the economy reopens, there are going to be more people buying cigarettes on their way to work and more social smokers lighting up at gatherings. Management was cautious about a potential rebound, saying, “It is uncertain if any rebound will occur this year” and assuming the historic average decline of 2-3% to be the floor for 2021. But there’s a decent chance that sales rebound slightly. That chance is not being priced into shares.

RRP sales increased 22.2% to nearly $7 billion in 2020. RRPs accounted for nearly a quarter of Philip Morris’ total revenue for the full year. Granted, the vast majority of this growth is coming from people who have quit smoking cigarettes – Philip Morris isn’t acquiring many new customers – but it’s a heck of a lot better than losing a customer entirely. The long-term growth outlook for this segment is outstanding, and the short-term growth outlook is no different.

The Valuation is Very Reasonable

Philip Morris’ viability as an investment is very price-dependent. This is a company that, at best, will grow revenue and earnings at single-digit rates over the long run.

With a forward P/E of 14.4 and a dividend yield of 5.50%, Philip Morris’ overall sales and earnings could stay flat and you’d do pretty well. The fact that there is some growth potential is just icing on the cake.

PM Just Broke Out of a 2+ Year Base

Philip Morris shares had been rangebound between around $53 and $85 for 2+ years. Until last week.

PM shares have built up a lot of momentum over the last two weeks; they are up more than 8% in the month of February alone. Although the volume on the breakout was roughly average, the fact that shares broke out after hitting resistance in the low-to-mid $80s so many times bodes well for PM.

The valuation, dividend, and price action combine to make Philip Morris shares an excellent investment.